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Globalization and Individual Gains from Trade (revised version)

Author

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  • Kristian Behrens
  • Yasusada Murata

Abstract

We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. Using data on GDP per capita and population, as well as on the U.S. income distribution, we illustrate our theoretical results in two different contexts: the hypothetical bilateral trade liberalization between the U.S. and 188 countries; and the historical sequence of U.S. free trade agreements since 1985.

Suggested Citation

  • Kristian Behrens & Yasusada Murata, 2012. "Globalization and Individual Gains from Trade (revised version)," Cahiers de recherche 1218, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1218
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    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2012/CIRPEE12-18.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Behrens, Kristian & Mion, Giordano & Murata, Yasusada & Suedekum, Jens, 2017. "Spatial frictions," Journal of Urban Economics, Elsevier, vol. 97(C), pages 40-70.
    2. Behrens, Kristian & Pokrovsky, Dmitry & Zhelobodko, Evgeny, 2014. "Market Size, Entrepreneurship, and Income Inequality," CEPR Discussion Papers 9831, C.E.P.R. Discussion Papers.
    3. Hakan Yilmazkuday, 2017. "A Solution to the Missing Globalization Puzzle by Non-CES Preferences," Review of International Economics, Wiley Blackwell, vol. 25(3), pages 649-676, August.
    4. Alexander Tarasov, 2014. "Preferences and income effects in monopolistic competition models," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(3), pages 647-669, March.
    5. Yilmazkuday, Hakan, 2016. "Constant versus variable markups: Implications for the law of one price," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 154-168.

    More about this item

    Keywords

    Income heterogeneity; product diversity; pro-competitive effects; general equilibrium; monopolistic competition;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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